Retail veteran
Solomon Lew
is eyeing acquisitions worth $1.8 billion but is reluctant to spend until consumer confidence is restored and the new government fixes “draconian" labour laws.

Mr Lew has hired some of Australia’s top retailers, including former
David Jones
executives
Mark McInnes
and
Colette Garnsey
and former
Myer
executive
Judy Coomber
, and wants to put their skills to work beyond the 986-store
Premier Investments
network.

“We are continuously reviewing opportunities," Mr Lew told The Australian Financial Review after Premier reported a weaker-than-expected 1.4 per cent increase in normalised net profit to $69.3 million for the year ending July.

“It depends on government and what policies they implement and on industrial relations laws . . . and the landlords and how they can best accommodate us. We’re not going to spend any money until we know we can make a lot of money on it."

Mr Lew said the Labor government’s “to-ing and fro-ing and policy on the run" over the past six years had hindered business investment, while its “inept’’ handling of the mining boom and its “complete disregard" for the non-resources sector of the economy had contributed to the poor health of the retail sector.

Mr Lew and Mr McInnes, Premier Retail’s chief executive, renewed calls for the Abbott government to eliminate the $1000 GST-free threshold on goods bought online from overseas, saying the loophole was costing retail jobs and curtailing investment, and demanded an urgent overhaul of the industrial relations system.

“I’m hoping the Coalition government understands that for workforces to get salary increases there need to be productivity offsets – there needs to be a direct link between pay and productivity," said Mr McInnes.

“What the new government needs to concentrate on . . . is what you would call CPR – C stands for confidence, P for productivity and R stands for being responsible," Mr Lew said.

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Big bucks in Breville stake

Premier Investments has $313million in cash, little debt, and Mr Lew says its 26 per cent stake in appliance company Breville, which has a market value of $287 million, is worth more than $400 million.

“If you want to leverage that, it’s $1.8 billion [of firepower]. Give me the right environment and give me the right business at the right price," said Mr Lew, who is touted as a potential bidder for Myer or David Jones.

“We are not looking at a capital return but deploying our capital," he said. “Our shareholders want us to grow our business because they realise we have the best retail management team in Australia."

After two years of fixing Premier’s retail business by slashing costs, overhauling supply chains and investing in new management and better product and design, Mr Lew and Mr McInnes are now shifting into a new growth and investment phase.

On Tuesday, the company unveiled plans to take the fast-growing Smiggle stationery brand into the UK, opening five to eight stores by the end of 2014 and 20 to 40 stores a year over the next few years. Premier sees potential for as many as 200 UK stores, generating annual sales of more than $200 million, and plans to use the UK as a springboard into Europe in the longer term.

“We have ambitious growth plans for Smiggle, which we see as a completely unique brand in the international market," said Mr McInnes.

The company also announced plans to grow the Peter Alexander sleepwear business by 40 per cent to 50 per cent in the next three years, opening six to eight new stores a year, rolling out a dedicated childrenswear strategy and entering into an exclusive supply and concession relationship with Myer.

Broker UBS estimates that about 90 per cent of Premier’s top-line sales growth over the next three years will come from the expansion of Peter Alexander and Smiggle. These brands are less exposed to online and global competition than Premier’s fashion brands such as Dotti, Portmans and Jay Jays.

Bad news for mature brands

However, the European and Asian expansion plans were overshadowed by further deterioration in the mature Just Jeans and Jay Jays brands, which account for 43 per cent of group sales.

While sales at Peter Alexander rose 18 per cent and Smiggle sales rose 14.5 per cent, Just Jeans sales fell 3.3 per cent and Jay Jays fell 11.1 per cent.

Total sales across the group rose less than 1 per cent to $836.4 million, despite the opening of new stores, and same-store sales fell 1.8 per cent, an improvement on the 6.7 per cent decline in same-store sales in 2012.

Premier shares, which have risen 25 per cent this year, fell 7¢ to $8.31. The group declared a final dividend of 19¢ a share, compared with 18¢ in 2012, taking the full-year payout to 38¢.

Citigroup analyst Craig Woolford said Just Jeans and Jay Jays were crucial to a turnaround of the group.

“The expansion strategy revealed for Smiggle into the UK is a positive," said Mr Woolford. “However, our bigger concern is halting the decline in the mature store brands."

Said Perpetual’s head of Australian equities, Matt Williams: “There’s no doubt that Just Jeans and Jay Jays are under pressure, but the bright outlook for Smiggle and Peter Alexander combined with a high cash pile and Breville investment counterbalance this somewhat. If management are able to turn around Just Jeans and Jay Jays, a decent story could become a very good story."

Mr McInnes said fixing Jay Jays and Just Jeans was now his top priority. Colette Garnsey, head of brands, is now overseeing Jay Jays while Premier searches for a new boss to replace former Myer Miss Shop head Deanna Moylan. Mr McInnes has also hired a former fashion director from UK department store John Lewis to turn around the Just Jeans business.

Premier’s bottom-line net profit jumped from $68.3 million to $174.5 million, buoyed by a one-off gain of $105.2 million as Premier started equity accounting its stake in Breville.

Premier gave no guidance for 2014, but said the environment remained challenging. “Unlike other retailers, we’ve got unique growth programs in Smiggle and Peter Alexander which set us apart from other listed retailers," Mr McInnes said.

Overhaul ongoing

Mr McInnes is trying to minimise the impact of competition from new international online and bricks-and-mortar retailers by building online and mobile stores, investing in marketing and design, and sourcing more stock directly from Asia – in some cases from the same factories that supply fast fashion chains Topshop and H&M – to boost gross margins.

Gross margins rose 117 basis points to 62.3 per cent, but the cost of doing business rose 3.4 per cent, including higher store wages to support the expansion of Peter Alexander and Smiggle.

Online sales rose 37 per cent over the year to about 3 per cent of sales. Mr McInnes wants to lift online sales to 10 per cent of total sales over time.

The group is also closing under-performing stores and negotiating rent reductions with landlords. Rent at established brands fell 2.4 per cent.

During the year, Premier Retail conducted a major supply chain review across all of its distribution centres and logistics operations in Australia, New Zealand and Singapore.

Following the review, Premier has established a new Singapore distribution centre to service its growing Asian retail network, with margin benefits expected to flow through this year. Premier has reconfigured the New Zealand distribution centre, shrinking space floorspace by 22 per cent while accommodating online sales, and has decided to consolidate the Australian distribution centre operations. It will build a single national centre outside Melbourne at a cost of $27 million including fitout.

One-off transition costs of $3 million to $4 million will be incurred this year to relocate operations and close distribution centres in NSW and Victoria, but Premier expects to save costs over time.